CSjDecember 2019

ESG updateCompetition lawTax residency

Global governanceEmerging trends

A Party for Governance Professionals

A Party for Governance Professionals

Thursday 16 January 2020

The Hong Kong Institute of Chartered Secretaries 香港特許秘書公會 (Incorporated in Hong Kong with limited liability by guarantee)

For booking enquires, please contact Vicky Lui: 2830 6088 or email: member@hkics.org.hk.

For lucky draw sponsorship, please contact Eva Cheung: 2830 6019 or email: event@hkics.org.hk.

The Hong Kong Institute of Chartered Secretariespresents:

Annual Dinner 2020Guest of Honour:

Lui Tim Leung, Tim SBS JPChairman, Securities and Futures Commission (SFC)

Fees: HK$880 per HKICS student

HK$1,280 per HKICS member/graduate

HK$1,480 per non-member

HK$15,360 per table of 12 seats

Attire: Lounge suit

Ballroom, JW Marriott Hotel Hong Kong

6.30pm Cocktail reception | 7.30pm Dinner

AD_2020.indd 1 9/12/19 4:43 pm

www.vistra.com

Vistra’s services are entirely bespoke and relevant to our clients’ needs. We have a proven track record of getting it right! We work as our clients’ trusted partner in all corners of the world.

Our one-stop solutions include:

• Incorporation of onshore and o�shore entities

• International expansions into Europe, US, and Asia

• Statutory corporate compliance

• Work visas, payroll, accounting and tax compliance

In addition, our range of services spans from specialised solutions for IPOs and listed companies to alternative investments services, they include:

• Secretarial services for IPOs and listed companies

• Trusts for Pre-IPOs and employee benefit schemes

• Fund set up and fund administration

• Consolidated SPVs services

Vistra Provides One-stop Solutions to Listed Companies and Multinational Corporations瑞致達為上市公司及跨國企業提供一站式解決方案

Worldwide experience, World-class expertise.

For further information, please contact us at +852 2848 0243 or email to hkcs@vistra.com如需更多資料，請致電+852 2848 0243或電郵至 hkcs@vistra.com 與我們聯繫。

DISCLAIMER: This document is subject to, and must be read in conjunction with our Legal Notice (including Disclaimer) at http://www.vistra.com/notices. Copyright © December 2019 by Vistra Group Holdings SA. All Rights Reserved.

瑞致達針對客戶的需求提供全面、量身定制的服務。我們的服務往績彪炳！無論客戶希望在何處開展業務，我們一直是客戶值得信賴的合作夥伴。

我們的一站式解決方案包括：

• 在岸和離岸公司成立

• 拓展國際業務至歐洲、美國及亞洲• 企業法定合規• 工作簽證、支薪、會計及稅務合規

此外，我們的服務範圍廣泛，由首次公開招股（IPO）和上市公司相關的專業解決方案，至另類投資服務，當中包括：

• 為首次公開招股和上市公司提供秘書服務• 上市前的信託安排及員工福利計劃• 基金設立及基金行政管理服務• 特殊目的公司整合

Good governance comes with membership About The Hong Kong Institute of Chartered SecretariesThe Hong Kong Institute of Chartered Secretaries (HKICS) is an independent professional body dedicated to the promotion of its members’ role in the formulation and effective implementation of good governance policies, as well as the development of the profession of Chartered Secretary and Chartered Governance Professional in Hong Kong and throughout the Mainland. HKICS was first established in 1949 as an association of Hong Kong members of The Chartered Governance Institute – formerly known as The Institute of Chartered Secretaries and Administrators (ICSA) of London. It was a branch of The Chartered Governance Institute in 1990 before gaining local status in 1994 and has also been The Chartered Governance Institute’s China Division since 2005. HKICS is a founder member of Corporate Secretaries International Association Limited (CSIA), which was established in March 2010 in Geneva, Switzerland. In 2017, CSIA was relocated to Hong Kong where it operates as a company limited by guarantee. CSIA aims to give a global voice to corporate secretaries and governance professionals. HKICS has over 6,000 members and 3,200 students.

Council 2019David Fu FCIS FCS(PE)– President Dr Gao Wei FCIS FCS(PE) – Vice-PresidentGillian Meller FCIS FCS – Vice-PresidentDavid Simmonds FCIS FCS – Vice-PresidentErnest Lee FCIS FCS(PE)– TreasurerProfessor Alan Au FCIS FCSDr Eva Chan FCIS FCS(PE)Loretta Chan FCIS FCSArthur Lee FCIS FCS(PE)Stella Lo FCIS FCS(PE)Professor CK Low FCIS FCSNatalia Seng FCIS FCS(PE)Bernard Wu FCIS FCSXie Bing FCIS FCSWendy Yung FCIS FCSIvan Tam FCIS FCS – Past President

Committee chairmen Audit Committee: Arthur Lee FCIS FCS(PE)Education Committee: Dr Eva Chan FCIS FCS(PE)Human Resources Committee:Maurice Ngai FCIS FCS(PE) Membership Committee: Stella Lo FCIS FCS(PE) Nomination Committee:Edith Shih FCIS FCS(PE) Professional Development Committee:Gillian Meller FCIS FCS

SecretariatSamantha Suen FCIS FCS(PE) Chief ExecutiveMohan Datwani FCIS FCS(PE) Senior Director and Head of Technical & ResearchLouisa Lau FCIS FCS(PE) RegistrarCarman Wong FCIS FCS(PE) Company SecretaryMelani Au Senior Manager, MembershipKaren Ho Senior Manager, Finance and Accounting Jessica Pang Senior Manager, Marketing & CommunicationsKenneth Jiang FCIS FCS(PE), Beijing Office Chief Representative

The Hong Kong Institute of Chartered Secretaries(Incorporated in Hong Kong with limited liability by guarantee)3/F, Hong Kong Diamond Exchange Building, 8 Duddell Street, Central, Hong KongTel: (852) 2881 6177 Fax: (852) 2881 5050

Email: ask@hkics.org.hk (general) cpd@hkics.org.hk (professional development) member@hkics.org.hk (member) student@hkics.org.hk (student)Website: www.hkics.org.hk

Beijing Representative Office Rm 15A04A, 15A/F, Dacheng Tower, No 127 Xuanwumen West StreetXicheng District, Beijing, 100031, PRCTel: (86) 10 6641 9368 Fax: (86) 10 6641 9078 Email: bro@hkics.org.hk

Membership statistics updateAs of 31 October 2019 membership statistics were as follows:Students: 3,366 Graduates: 588Associates: 5,466Fellows: 697

December 2019CSj, the journal of The Hong Kong Institute of Chartered Secretaries, is published 12 times a year by Ninehills Media and is sent to members and students of The Hong Kong Institute of Chartered Secretaries and to certain senior executives in the public and private sectors.

Views expressed are not necessarily the views of The Hong Kong Institute of Chartered Secretaries or Ninehills Media. Any views or comments are for reference only and do not constitute investment or legal advice. No part of this magazine may be reproduced without the permission of the publisher or The Hong Kong Institute of Chartered Secretaries.

Circulation: 8,200Annual subscription: HK$2,600 (US$340)To subscribe call: (852) 3796 3060 oremail: enquiries@ninehillsmedia.com

Editorial BoardKieran Colvert Mohan Datwani Paul Davis Robin HealyErnest Lee

CreditsKieran ColvertEditorEster WensingArt Director

Contributors to this edition Edith ShihThe Chartered Governance InstituteConnie HY Lee andTommy CheungDes Voeux ChambersColum BancroftAlixPartnersGabriela Kennedy andKaren HF LeeMayer Brown

Advertising sales enquiriesNinehills Media LtdTel: (852) 3796 3060Jennifer LukEmail: jennifer@ninehillsmedia.comFrank PaulEmail: frank@ninehillsmedia.com

Ninehills Media Ltd12/F, Infinitus Plaza199 Des Voeux Road Sheung WanHong KongTel: (852) 3796 3060Fax: (852) 3020 7442Internet: www.ninehillsmedia.comEmail: enquiries@ninehillsmedia.com© Copyright reservedISSN 1023-4128

Li ZhidongLow Chee KeongSamantha Suen

Harry HarrisonIllustrator (cover) Images123rf.com

Suson LoTricorHenry Kwong andMatthew CheungCheng & Cheng Taxation Sevices

The Chartered Governance InstituteGovernance Institute of AustraliaLevel 10, 5 Hunter Street Sydney, NSW 2000 Australia Tel: (61) 2 9223 5744Fax: (61) 2 9232 7174

The Chartered Governance Institute of Canada202–300 March RoadOttawa, ON, Canada K2K 2E2Tel: (1) 613 595 1151Fax: (1) 613 595 1155

MAICSA: The Chartered Governance Institute No 57 The Boulevard Mid Valley City Lingkaran Syed Putra59200 Kuala Lumpur MalaysiaTel: (60) 3 2282 9276Fax: (60) 3 2282 9281

Governance New ZealandPO Box 444Shortland StreetAuckland 1015New Zealand Tel: (64) 9 377 0130Fax: (64) 9 366 3979

The Singapore Association of the Institute of Chartered Secretaries & Administrators149 Rochor Road #04–07 Fu Lu Shou ComplexSingapore 188425Tel: (65) 6334 4302Fax: (65) 6334 4669

Chartered Secretaries Southern AfricaPO Box 3146Houghton 2041Republic of South AfricaTel: (27) 11 551 4000Fax: (27) 11 551 4027

The Chartered Governance Institutec/o MCI UK Durford Mill, PetersfieldHampshire, GU31 5AZUnited KingdomTel: (44) 1730 821 969

ICSA: The Chartered Governance InstituteSaffron House, 6–10 Kirby StreetLondon EC1N 8TSUnited KingdomTel: (44) 20 7580 4741Fax: (44) 20 7323 1132

The Institute of Chartered Secretaries & Administrators in ZimbabwePO Box CY172Causeway HarareZimbabweTel: (263) 4 702170Fax: (263) 4 700624

ContentsCover StoryThe global future of governance 06Edith Shih FCIS FCS(PE), International President, The Chartered Governance Institute, looks at emerging trends in governance.

In ProfileESG: how economics drives change 10Pat Nie Woo, Partner, Business Reporting and Sustainability, KPMG China, argues that making improved environmental, social and governance (ESG) performance an economic necessity will be our path to a more sustainable future.

In FocusDouble anniversary reflections 16Three speakers lined up for a cocktail reception to celebrate the Institute’s double anniversary share their reflections on the past and the future of the Chartered Secretary and Chartered Governance profession in Hong Kong and Mainland China.

Competition law enforcement 20Connie HY Lee and Tommy Cheung, Barristers-at-Law, Des Voeux Chambers, consider the implications of Hong Kong’s first two competition law enforcement actions, with a focus on the attribution of liability.

International ReportUS-China trade war: responding to uncertainty 24Colum Bancroft, Managing Director, AlixPartners, looks at the risks and compliance issues arising from market conditions resulting from the current US-China trade war.

Mainland ReportChanges on the horizon 28Gabriela Kennedy, Partner, and Karen HF Lee, Counsel, Mayer Brown, discuss the implications of new draft measures relating to China’s Cybersecurity Law.

Technical UpdateCharitable organisations 32Susan Lo FCIS FCS(PE), Executive Director of Corporate Services, Tricor Services Ltd, reviews the interpretation of a charitable organisation in Hong Kong.

Tax residency of Hong Kong corporations 38Henry Kwong, Tax Partner, and Matthew Cheung, Tax Manager, Cheng & Cheng Taxation Services Ltd, guide us through the process of obtaining a Certificate of Resident Status in Hong Kong.

HKICS News

President’s Message 04

Institute News 42

Student News 46

Wishing you a happy and healthy holiday

season filled with love, laughter and

friendship!

President’s Message

December 2019 04

David Fu FCIS FCS(PE)

The road ahead

It has been my great honour to serve as president of our Institute for the

past two years. As you will see from our Annual Report 2019, now available on our website, our Institute is in good financial health. We made, together with our subsidiaries, an operating surplus of HK$1.4 million in fiscal 2019. We have also passed several important milestones in the evolution of our profession and our Institute. In particular, we have launched the new dual Chartered Secretary and Chartered Governance Professional (CS/CGP) designation, and we have laid the groundwork for the launch of the Chartered Governance Qualifying Programme, which will replace the International Qualifying Scheme next month.

My successor in the presidency, however, will be taking over at a time of unprecedented challenges. 2019 has seen the most serious political and social unrest in Hong Kong in living memory. As if that was not enough, the ongoing Sino-US trade war, technological disruption and escalating risks from climate change continue to make the road ahead uncertain. The rapidly changing and increasingly treacherous landscape we find ourselves in has reinforced the need for members of our profession to be well prepared when it comes to future risks. This requires both access to reliable information and the prescience to understand what that

information is telling us about the challenges we will be facing in the years ahead. Our CPD services and publications, including this journal, play a key role in assisting us in this endeavour and our cover story this month provides a very useful briefing on the broad trends that will be shaping our business environment and our profession over the next decade.

The article is based on the opening address by Edith Shih FCIS FCS(PE), International President of The Chartered Governance Institute and a former President of our Institute here in Hong Kong, at Governance New Zealand’s recent National Governance Conference. Edith looks at the impact of emerging technologies, the increased focus on non-financial aspects of corporate performance and reporting, and the shift to a multi-stakeholder model of governance. Taken together, these trends are indicative of a paradigm shift, not only here in Hong Kong but on a global scale, in our view of the very purpose of companies. The message is clear – organisations of the future, whether or not they take the traditional corporate form, will need to be better aligned with broader social interests.

I wish our next president every success at the helm of our Institute. Despite the many challenges ahead of us, there has never been a better time to be a governance practitioner. We will be at the epicentre of the many trends highlighted

above. This might seem a little daunting in terms of the heightened workload and responsibilities we will be taking on, but our Institute will continue to focus on providing relevant and practical support to members in their work.

One of the core aims of our Institute, both local and global, is to prepare our members for the emerging business environment. Next year (2020) will see the return of our biennial Corporate Governance Conference which has become a leading regional forum for debate and discussion on new developments in governance. I also urge members to regularly check on our website (www.hkics.org.hk) and our social media platforms, as well as the newly relaunched website of our international body (www.cgiglobal.org). These websites and social media platforms are your portal to the latest technical information and thought leadership offerings relevant to your work. They also provide access to our online professional community here in Hong Kong and right across the globe.

Finally, I would like to thank everyone who has worked with me during my tenure and I look forward to playing a continuing role in taking forward our professional goals.

December 2019 05

President’s Message

傅溢鴻 FCIS FCS(PE)

過去兩年出任公會會長，我深感榮

幸。正如2019年年報（見公會網

站）所報告，公會的財政狀況穩健，

在2019財政年度，公會聯同附屬機構

共錄得營運盈餘140萬港元。在管治專

業和公會的演化上，我們也經過幾個

重要里程碑，特別是推出了特許秘書

和Chartered Governance Professional (CS/CGP) 的雙重稱銜，並為公會新的專業

資格考試做好了準備工作，新的考試

體系將於下月開始取代國際專業知試

評審考試。

下任會長接棒的時候，公會正面臨史

無前例的挑戰。201 9年是記憶中香

港政治與社會最動盪的一年，加上中

美貿易戰持續、科技發展打亂既有秩

序、氣候變化帶來更大風險，使前路

更不明朗。面對瞬息萬變、暗藏危險

的未來，治理專業人員更需要為未來

的風險作好準備，取得可靠的信息，

並理解該信息對我們日後所面臨的挑

戰有何啟示。公會的持續專業發展計

劃及各種刊物，包括本月刊，在這方

面起着重要的輔助作用；而今期的封

面故事，就概括說明了未來十年影響

營商環境和治理專業的各種趨勢。

該封面故事，是以特許公司治理公會

國際會長、香港公會前會長施熙德律

師FCIS FCS (PE)最近在新西蘭的全國

治理會議上的開場發言為基礎。施律

師講解了新科技的影響、人們對公司

業績及報告中非財務內容日漸關注的

情況，以及向多方利益相關者治理模

式的轉換。這些趨勢顯示人們對公司

成立目的的看法有了轉變；這種轉變

不僅限於香港，在全球各地的情況也

相同。當中的信息十分清楚：未來的

機構，不管是否以傳統的公司形式組

成，都需要與較廣闊層面的社會利益

契合。

我祝願下任會長成功領導公會。儘管

面對種種挑戰，現在是從事治理專

業的最佳時機。我們將處於上文所述

種種趨勢的中心點。工作量增加，責

任加重，也許有點令人生畏，但公會

將繼續為會員提供相關實務方面的協

助，支援他們的工作。

公會的核心目標之一，是在本地和全

球層面，幫助會員做好準備，以應對

未來的營商環境。2020年再次舉辦兩

年一度的公司治理研討會，這是討論

未來展望

治理新發展的重要地區論壇。我亦促

請會員經常留意公會網站 (www.hkics.org.hk)及社交媒體平台，以及國際總會

新近啟用的網站(www.cgiglobal.org)；這

些網站和社交媒體平台，為各位帶來

與工作相關的最新技術資訊及領導思

維的資料及活動，同時可讓大家透過

網上平台接觸香港和世界各地的業內

人士。

最後，我謹向任內曾與我共事的各人

致謝。期望能繼續協助貫徹公會的宗

旨，為治理專業的目標努力。

December 2019 06

Cover Story

The global future of governance In October this year, Edith Shih FCIS FCS(PE), International President, The Chartered Governance Institute, delivered the opening address of Governance New Zealand’s National Governance Conference. In this article, based on her speech, she looks at emerging trends in governance that will present great opportunities for practitioners able to keep up with the fast-changing landscape.

December 2019 07

Cover Story

• the focus on ‘corporate governance’ will shift towards a focus on ‘governance’ alone as heightened expectations of good governance expand to a much wider scope of non-listed organisations

• artificial intelligence will not undermine the relevance and importance of governance professionals – on the contrary, it will enhance the quality and value of what they bring to organisations

• emerging trends in governance are irreversible, expanding and accelerating but they present great opportunities for practitioners able to keep up to date with the fast-changing landscape

Highlights

The theme of today’s conference is ‘The global future of governance’. I

recall the oft-expressed warning against making predictions, especially about the future. It’s extremely wise advice. Let me be amongst the many people who fail to follow it. I believe that we stand on the threshold of a revolution in governance. Indeed, I believe we are actually already in it. There are many elements to this revolution. In my brief remarks today, I would like to touch on some of these.

Capital market trendsThe development of corporate governance in its modern form can be traced back to the early 1990s, notably the publication of the ‘Cadbury Report’ in the UK. Since then, and reflecting those origins, corporate governance in developed and developing economies has been marked by a strong focus on listed companies. However, we are seeing a widespread decline in the number and economic importance of public and listed companies relative to other capital-raising structures. Businesses and investors are increasingly turning to other structures such as venture capital, private equity, hedge funds, family offices and sovereign wealth funds.

Some of these structures have existed for many years; others, such as crowdfunding, are more recent. But, despite their massive growth and the importance of their role in the global economy, their governance has not been subject to the same degree of attention, transparency and oversight that has been devoted to listed companies. I expect this to change and I think it should change.

Governance processes, policies and disciplines will extend to organisations and entities that deliver a greater

range of economic, social, cultural and environmental value – whether in the private sector, the public sector or the third sector of non-governmental, charitable and community organisations. Any undertaking that plays a substantial role in the well-being of society, especially one which enjoys the privileges of external funding and limited liability, will become the subject of heightened expectations of good governance. This will make a positive difference.

By way of illustration, New Zealand is renowned for sporting excellence. It is a world leader in sports such as rugby, cricket and netball, to name just a few. It is also renowned for excellence in sports governance. The two are not unconnected. I understand that, as recently as the Cricket World Cup, some commentators attributed the relative performance of the New Zealand and Sri Lankan teams less to the talent of their individual players, but to the difference in the quality of governance of the two cricket authorities in developing and maximising that talent.

It is because of the expansion of governance expectations and standards to

a much wider field of entities that it is no longer appropriate to speak of ‘corporate governance’. As the title of this conference rightly expresses, we must now think, speak and act in terms of ‘governance’, full stop.

Non-financial performance measuresI also expect governance to continue the trend of recent years to reach beyond accounting and financial concerns, and encompass much wider aspects of environmental and social performance. Perhaps as recently as 10 to 15 years ago it would have been rare for any company to report on its carbon emissions. Now, this would be expected of any responsible undertaking – as would reporting on its performance across a sweep

I believe that we stand on the threshold of a revolution in governance. Indeed, I believe we are already in it.

December 2019 08

Cover Story

any undertaking that plays a substantial role in the well-being of society… will become the subject of heightened expectations of good governance

of deliverables, such as on diversity, supply chain management, community investment and much more. The scope of this reporting will only increase in the years to come.

The shift to a multi-stakeholder modelWe will also see governance continue to recognise the duties owed by business not only to shareholders, but to a much larger group of stakeholders. Identifying those stakeholders, deciding upon the nature of the obligations owed to them, measuring performance in meeting those obligations and the manner of reporting will be a growing component of effective governance. The focus on delivery of shareholder value will gradually merge into a broader notion of sustainable corporate performance.

The impact of technologyFinally, the impact of new and emerging technologies on governance will be immense. This is the most difficult aspect of the future to foretell. I think, albeit with due hesitation, that this impact will have at least two dimensions.

The first is that governance standards and requirements will need to evolve rapidly to enhance the controls, performance and transparency of companies that are carrying on forms of business hitherto unknown. We are already seeing this in the way in which companies such as Google, Facebook and Amazon are subject to growing questioning and scrutiny. Those, and for that matter other longstanding businesses which adopt new technology, will face greater obligations in matters such as data management, data privacy and cyber security. They will also need strengthened governance processes in order to discharge those obligations.

Secondly, new technology will provide governance practitioners with better tools to perform their role. In the IT field we will progress rapidly from corporate secretarial software systems through governance management and reporting systems to the era of artificial intelligence (AI). I am unsure quite how AI will affect governance. However, I am absolutely sure that this will not undermine the relevance and importance of our work. On the contrary,

it will enhance our capabilities and, in so doing, the quality of what we do and the value we bring to all stakeholders.

Don’t get left behindAll of the trends I have suggested have several things in common: they are irreversible, they are expanding, they are accelerating and they all present great opportunities. I say with confidence that there has never been a better time to be a governance practitioner and there has never been a better time to reflect on the future of governance. We cannot predict the future, but we can prepare for it.

Edith Shih FCIS FCS(PE) International President, The Chartered Governance Institute

This article has been adapted from the opening address delivered by Edith Shih FCIS FCS(PE), International President, The Chartered Governance Institute, at Governance New Zealand’s 2019 National Governance Conference held in Auckland on 1 October.

To find out more about the CGQP, please scan the QR code or visit the Studentship section of the Institute's website: www.hkics.org.hk or contact the Education and Examinations Section: 2881 6177.

For enquiry, please contact the Education and Examinations Section at 2881 6177 or email student@hkics.org.hk.

Chartered Governance Qualifying Programme (CGQP)

CGQP Programme Structure

1January

2020

From

Corporate Governance

Corporate Secretaryship and Compliance

Hong Kong Company Law

Interpreting Financial and Accounting Information

Strategic Management

Risk Management

Boardroom Dynamics (elective), or Hong Kong Taxation (elective)

The Hong Kong Institute of Chartered Secretaries is pleased to announce the launch of the Chartered Governance Qualifying Programme (CGQP) as its new qualifying programme on 1 January 2020. CGQP will then replace the current International Qualifying Scheme.

CGQP empowers aspiring governance professionals to excel!

Part1

Part2

The Hong Kong Institute of Chartered Secretaries 香港特許秘書公會(Incorporated in Hong Kong with limited liability by guarantee)

December 2019 10

In Profile

ESG: how economics drives change

In Profile

December 2019 11

The cost of capital is also going to push the drive on ESG. HSBC this year initiated two schemes with Walmart and Puma whereby the score given to the suppliers of these two corporates will in turn determine the terms they will obtain from HSBC. Essentially, if a supplier is laggard in sustainability it is going to be harder to roll over existing terms and more expensive.

The regulators are also getting involved. For example, the Hong Kong Monetary Authority has made announcements on sustainable banking and is expected to require the industry to change its view of sustainable banking and green financing. If regulators start to put pressure on banks to initiate these measures, it would become a funding advantage for companies to increase their sustainability commitment. That really is when the message is going to start hitting home.’

What role can sustainability indexes play in driving better ESG performance?‘If you want to get to the premier league, getting on these indexes is important as

Pat Nie Woo, Partner, Business Reporting and Sustainability, KPMG China, argues that making improved environmental, social and governance (ESG) performance an economic necessity will be our path to a more sustainable future.

With United Nations reports containing escalating warnings on the seriousness of the climate crisis, how do you rate the significance of threat we face globally and locally?‘We conducted a global CEO survey this year and climate change climbed to number one on the risk radar of global CEOs, which was surprising for us. I think there is a lot happening in the investment space and it impacts how CEOs and their companies look at it.

400 different climate records were broken in the northern hemisphere over this summer. How are we to meet the Intergovernmental Panel on Climate Change (IPCC) trajectory for the next 12 years if there aren’t significant changes in regulation and in the cost of capital? Pressure is coming not only from investors but also from the regulators, as well as those who provide capital, the banks, insurance companies and finance companies. As the situation gets more severe, the outcry will increase, and governments and corporates will need to react.’

Do you see real commitment from the board level downwards?‘Though we have companies that are doing well or catching up, at this stage of the game Hong Kong remains at the box-ticking phase. This is because boards and the C-suite do not quite connect why this is relevant to their business and are struggling to understand that investors are starting to ask more pertinent questions. Look at general board composition in Hong Kong – not many directors understand ESG.

financial media like Bloomberg, major asset owners like pension funds and institutional asset managers will take a lot more notice of your organisation once you are on these ESG indexes.’

There are many indexes with different rating systems. Do we need a more standardised rating system?‘There is a lack of correlation. We are still at the initial stages of this development and it is sporadically used right now. However, as more people use the ratings there will be streamlining, and eventually we will get to the point of integrating and standardising these things. Look at financial accounting – it has been 200 years in development. Things move a lot faster now and it is still evolving. ESG elements have only become important in the last 10 to 15 years, and even more recently in Hong Kong.’

What has been the impact of the Task Force on Climate-related Financial Disclosures (TCFD)?‘The TCFD is ultimately a game changer because it is effectively looking at the

• the pressure on the investment community, the corporates and the banks, will escalate over time – it would be foolhardy for anyone to think that they are immune to it

• change is coming as the cost of lending to carbon-heavy operations is going to significantly increase over time

• it is always economics that drives change – when the economics and the incentives are in line, people will do what is needed without being asked

Highlights

December 2019 12

In Profile

generation will not be able to hear it as they will only hear it from a compliance standpoint. That is where the education needs to be – the developments in the investment community, the TCFD and how that is going to impact financing, as well as the costs of not doing anything due to physical and transitional risks due to climate change.’

The latest Hong Kong Stock Exchange consultation you mentioned proposes to make board oversight of ESG a mandatory disclosure – will this help to raise ESG up the board agenda?‘On how the board gets involved, we need to emphasise the ‘how’. Of course you are going to get boilerplate disclosures. The company secretary needs to highlight this to the board in some way or form. Board education needs to be organised around it, explaining what this all means, and why the SEHK is doing it. I do see a gap in the understanding of ESG at the board level.

We just issued a sustainability report for the Fashion Summit. We looked at 43 original signatories to the UN Fashion Charter, all of whom had committed to a 30% carbon reduction by 2030, but hardly any of them had disclosed supply chain data. The supply chain is the

on strike, these things are just going to increase. The pressure on the investment community, the corporates, the banks, will just escalate over time. It would be foolhardy for anyone to think that they are immune to it.’

How would you tackle the issue of boilerplate sustainability reports?‘As the investment community matures, you can tell very quickly whether people are serious about ESG. Investors are starting to go directly to the top, to the CEOs and CFOs, to assess whether the C-suite are in tune with their ESG strategy and how it relates to their business.

The latest ESG consultation of the Hong Kong Stock Exchange (SEHK)focuses on the governance aspects of ESG. It asks how closely directors and senior managers are engaged in these issues. Do they understand their non-financial risks? Do they understand the ESG opportunities out there? Do they understand the difference between physical risk and transition risk? When you talk about climate change, most people only think about the physical risks of typhoons and floods etc, rather than the risk to business models. We see change coming as the cost of lending to carbon-heavy operations is going to significantly increase over time.’

Should company secretaries be pushing ESG issues at board meetings?‘There still needs to be a lot of education. We have been doing a number of board training sessions with our clients. It is really the next generation of leaders that is asking for this as they see the importance of getting the message across. The message has to correlate with their core business or the older

financial risk of the financial institutions relating to climate change. They have to look at their loan books, their investments. Insurance companies have to look at their investments and the projects that they are financing. They will need a governance framework, a strategic framework, a risk assessment framework, on all of their core businesses. When that happens, any laggards on ESG that they are providing capital to, whether it involves investments, insurance or just plain loans, becomes a problem for them. Essentially, the TCFD will drive a lot more initiatives similar to the HSBC one mentioned above regarding Walmart and Puma, whereby financial institutions will not want to keep laggards on their books.’

TCFD is not just about the risk, it is also about opportunities. Are companies aware of the opportunities out there?‘I think companies are looking at opportunities and the better companies will be able to capture financing a lot more easily. There are many blue ocean strategies out there. Look at the automotive industry: countries have come out to say that they are going to eliminate petrol cars by a certain year. However, you have to look at not just the car manufacturers but the whole supply chain that supports it. Take Volkswagen for example, which is promoting its new apparently ‘carbon-neutral’ car. How can they make a carbon-neutral car if their supply chain partners are not also doing the same thing?

We are at that climate emergency phase. We have known about this for decades but progress has been very slow. We have seen Extinction Rebellion, people going

In the 12 years I have been doing this, I have tried the ‘this-is-the-right-thing-to-do’ argument and it does not work. The bottom line is what matters.

In Profile

December 2019 13

biggest impact on all of these brands and a lot of these supply chain companies are based in this part of the world.’

What role will technology play in all of this?‘The technological solutions are all out there and have been for a long time. It has always been about making economic sense and economies of scale. Renewable energy is now at the price of carbon-heavy solutions – why? Because economy of scale is increasing. Why is the petrol car cheaper than electric cars? It is the economy of scale. The solutions are there, but the challenge is to make it economically viable because people always go for the cheaper option. That is where the TCFD comes in, making it more expensive for some, but less expensive for those who are ready for it. I do not think it is a technological problem, it is definitely an economic and scale challenge.’

If governments alone cannot hope to raise the necessary funds to transition to low-carbon infrastructures globally, can green finance fill the financing gap?‘Green financing is definitely one of the

good options out there. We have seen a growth in that market though it is still not seen as more competitive than the traditional bonds. Again this is because of scale, because the whole debt market amounts to trillions of dollars compared to 300 billion for green bonds. Over time as demand starts to outstrip supply the economics will start to work. Both public or private finance can be used as a vehicle to help with greening of infrastructure. The Mainland has gone through a similar process.’

Is there sufficient audit of green finance projects to ascertain that they are genuinely having a positive environmental impact?‘The standards are there, ISA 3000 for instance, but there isn’t the regulatory framework to ensure that it is conducted properly. There has to be a minimum standard that people have to reach to be able to issue these reports; at the moment any company can write a non-financial assurance report.

The ESG consultation of the SEHK mentioned assurance from a best practice standpoint. They are mentioning assurance to indicate that this will be

a mandatory requirement sometime in the future. Before assurance becomes mandatory, what needs to be developed now is the regulatory framework. The question of who has oversight, the standards that are going to be used, and other details such as trust and transparency are critical.’

How do you expect ESG regulation to evolve in the next few years?‘I am optimistic because I think that the asset owners are the juggernaut that directly impacts the asset management industry, which then impacts the corporates, which then impacts the supply chain and the like. There are precedent cases: look at what happened in Japan. The government pension fund announced they were going to start using ESG as part of their investment decisions and the ESG investment industry grew from US$8 billion to US$2 trillion in four years. It is always economics that drives it. When the economics and the incentives are in line, people will do it without being asked.’

With the additional costs of outsourcing, how does this impact smaller companies?‘First of all, anybody can do a

December 2019 14

In Profile

sustainability report in-house. You do not need to outsource it; there are a lot of boutique firms that can help you with that at minimal cost.

Yes, it is a burden because there is more that you need to do, but the question is, how much is it going to cost you if you do not do it? As I mentioned earlier, the direction the financial institutions are moving in may mean your sustainability practices might not qualify you for their facilities. If that means you end up going to the secondary market that is going to be a lot more expensive. If you are positioning yourself to get your financing from the financial institutions your business model must be sound, even if your business is small.’

Do you think ESG performance will increasingly become a ‘social licence to operate’ issue – that is, companies will need to do the right thing by their community?‘To the millennials, yes this is important, but it all comes back to day-to-day behaviour, at the supermarket, at the clothing store. Is that consistent with what you are doing here? Where you put

your money is effectively giving your vote on how you want the world to be run. Until you burn a hole in someone’s pocket, you are really not going to change things much. In the 12 years I have been doing this, I have tried the ‘this-is-the-right-thing-to-do’ argument and it does not work. The bottom line is what matters. Can we steer money to work for the better?’

Could you tell us about your own career and what steered you towards your role in sustainability?‘I am an accountant by training but left accounting in 2004 to work in the textile supply chain. That was when I started thinking about stewardship. It is not just about here and now, it is really about the future as well. I have kids and that became a driver to understand what it means to look out for the environment and society. It has been an essentially self-taught journey.

Let me share an anecdote. In 2008, my company issued a Global Reporting Initiative report and won an award from the Association of Chartered Certified Accountants. However, the reason we

where you put your money is effectively giving your vote on how you want the world to be run

won was because we were the first supply chain company to have entered an ESG report in that category. I was very surprised. We were in the Pearl River Delta, the factory of the world, yet we were the first company to produce such a report. I still also remember a gloomy day in January 2009 when nobody touched an ESG report we did for a fashion event in New York. I asked myself then if I was barking up the wrong tree. But I slogged on.

Those were hard years without which I would not be here talking to you now. Even as recently as 2018 we were not hearing a lot about ESG, but now everyone is talking about it and these practices are starting to make economic sense. Ultimately I think it has all come from personal conviction and I had to go through that trial by fire to get to this point.’

Pat Nie Woo was interviewed by Sharan Gill, writer and lawyer, and Mohan Datwani FCIS FCS(PE), Senior Director and Head of Technical & Research, The Hong Kong Institute of Chartered Secretaries.

In Profile

December 2019 15

December 2019 16

In Focus

Double anniversary reflectionsA cocktail reception to celebrate 70 years of The Chartered Governance Institute and 25 years of The Hong Kong Institute of Chartered Secretaries in Hong Kong had to be cancelled last month. The three speakers lined up for the event share their reflections with this journal on the past and the future of the Chartered Secretary and Chartered Governance profession in Hong Kong and Mainland China.

December 2019 17

In Focus

Ada Chung FCIS FCS, JP, Registrar of Companies, Companies Registry, The Government of the HKSAR I would like to congratulate The Hong Kong Institute of Chartered Secretaries (the Institute) and The Chartered Governance Institute on this double anniversary year. As a leading international financial and business centre, Hong Kong attaches great importance to corporate governance. For companies to be successful, competitive and sustainable in the long term, good corporate governance is the key. A high standard of corporate governance is not only essential for individual companies, it is also crucial for maintaining the credibility, stability and competitiveness of a financial market.

While the Institute is officially 25 years old, its origin can be traced back to the year 1949 when about 20 members of The Institute of Chartered Secretaries and Administrators (ICSA) – now known as The Chartered Governance Institute – gathered together to form an informal association. Over the years, members of the Institute and its international body have played a key role in fostering good corporate governance in Hong Kong, through various initiatives and series of professional talks and training courses.

To cite some examples, the Institute has been organising its biennial corporate governance conference since 1998 and its Annual Corporate and Regulatory Update since the year 2000. To keep members abreast of the latest developments affecting the business community and the profession, the Institute has jointly organised conferences with overseas countries and jurisdictions to bring together experts locally and internationally to share experience.

Another notable achievement of the Institute is its successful work with young

people, including university and secondary school students. I commend the Institute’s foresight in nurturing the younger generation and its efforts in organising, for example, the Student Ambassadors Programme and the ‘Passing the Torch’ programme.

The Institute has also been promoting international standards in anti–money laundering and counter–financing of terrorism (AML/CFT). It launched its AML/CFT Charter in 2016. As you may be aware, since 1991 Hong Kong has been a member of the Financial Action Task Force (FATF), an intergovernmental organisation which sets global standards for combating money laundering and terrorist financing. Beginning in 2018 and lasting for over a year, the mutual evaluation of Hong Kong was undertaken by an assessment team comprising 10 experts from FATF and the Asia/Pacific Group (APG) on money laundering.

The Mutual Evaluation report of Hong Kong was examined by FATF at its June Plenary held in Orlando, US and by APG at its August Plenary held in Canberra, Australia. The report was published by FATF in September this year and it assesses the compliance and effectiveness of

Hong Kong’s AML/CFT regime against international standards. It confirms that Hong Kong has a strong legal foundation and effective system for combating money laundering and terrorist financing. Hong Kong has been assessed, and is the first member jurisdiction in the Asia-Pacific region, to have achieved an overall compliant result. The assessment result is an affirmation of our community’s concerted efforts in upholding a robust AML/CFT regime. In this connection, I

• members of The Hong Kong Institute of Chartered Secretaries and its international body have played a key role in fostering good corporate governance in Hong Kong and the Mainland

• a high standard of corporate governance is not only essential for individual companies, it is also crucial for maintaining the credibility, stability and competitiveness of Hong Kong’s financial market

• The Chartered Governance Institute has positioned itself as the qualifying and membership organisation for anyone involved in governance

Highlights

Ada Chung, JP, Registrar of Companies

it is vital that company secretaries continue to perform their critical role in upholding good corporate governance and ensuring proper compliance in an ever- changing business environment

December 2019 18

In Focus

wish to take this opportunity to thank the Institute and its members for all your hard work on this front and your valuable support in the mutual evaluation exercise, in particular, during the on-site evaluation of Hong Kong in November last year.

As part and parcel of the government’s efforts in this regard, and with a view to further enhancing corporate governance and transparency, with effect from 1 March last year, all companies incorporated in Hong Kong are required under the Companies Ordinance to obtain and maintain up-to-date beneficial ownership information by way of keeping a Register of Significant Controllers. On the same date, a new licensing regime for Trust or Company Service Providers (TCSPs) commenced operation, with the Companies Registry taking up the role as the licensing authority. You may wish to know that up to the end of September, we have granted about 6,800 TCSP licences.

As you may be aware, currently there are more than 1.3 million companies registered in Hong Kong. In this year alone, up to the end of October, over 100,000 companies have been newly incorporated. In 2018, a total of about 3.6 million documents were delivered to the Companies Registry for registration. That amounts to a daily rate of nearly 14,000 documents, as compared to around 11,000 documents in 2017. Nothing could illustrate better than these figures the workload and importance of company secretaries. The huge number of documents which the Registry received shows firstly the importance of having all those documents/forms properly completed and filed in a timely manner to enhance transparency and in turn facilitate business; and secondly the importance of having a group of well-trained professionals to provide competent and proper advice

to companies and their officers on the regulatory requirements whenever necessary.

In the 2018 Corporate Governance (CG) Watch report published by the Asian Corporate Governance Association last December, Hong Kong ranked first in Asia and second in the Asia-Pacific region for corporate governance. In September, the Global Financial Centres Index once again ranked Hong Kong among the world’s top three financial centres, behind only New York and London. In October, the World Economic Forum’s Global Competitiveness Report ranked Hong Kong third, up from last year’s seventh place. According to the World Bank’s Doing Business 2020 report, released on 24 October 2019, Hong Kong ranked third globally in the ‘ease of doing business’ category, moving up one place from last year.

I believe that good corporate governance, effective regulatory regimes and a high standard of professional services are essential factors contributing to these remarkable achievements in Hong Kong. It is vital that company secretaries continue to perform their critical role in upholding good corporate governance and ensuring proper compliance in an ever-changing business environment. I would like to thank the Institute for its continuous efforts in enhancing professional standards and promoting good corporate governance in Hong Kong.

Edith Shih FCIS FCS(PE), International President, The Chartered Governance InstituteThis year we are celebrating the 70-year history of the Chartered Secretary and Chartered Governance profession in Hong Kong. We have come a long way, but I believe the most significant and strategic chapter in the history of our global institute is unfolding before us now.

The ICSA changed its name to The Chartered Governance Institute on 16 September 2019 and launched a new website and corporate identity on 5 November 2019. This historic change of our 125-year-old institute reflects and embraces how our global membership of governance professionals has evolved over the past decade. The ethos and new visual corporate identity encompass a wider remit to support and qualify Chartered Secretaries, governance advisers, risk and compliance managers and non-executive directors – basically anyone who takes on governance responsibilities in our increasingly regulated and risk conscious societies.

The new name positions The Chartered Governance Institute as the qualifying and membership organisation for anyone involved in governance, and it is the only such institute that is Chartered. Our global institute is the only international organisation that can offer qualifications which empower a person with skills that transcend borders. It facilitates the international movement of governance professionals, ensuring membership portability. The Chartered Governance Institute also sets the standards of the profession globally and defines the future of good governance.

Edith Shih, International President, The Chartered Governance Institute

there has never been a better time to be a governance practitioner

December 2019 19

In Focus

As the International President, I commend the good work done by our China Division in Hong Kong and the Mainland, as well as our other eight divisions across the world from Australia, Canada, Malaysia, New Zealand, Singapore and Southern Africa, to the UK, Republic of Ireland and Associated Territories and Zimbabwe.

Governance standards and requirements are evolving rapidly and so is our profession. This evolution is irreversible, and is expanding and accelerating as well. All these present great opportunities for qualified governance professionals. I say with confidence that there has never been a better time to be a governance practitioner. If you are not yet a Chartered Secretary or Chartered Governance Professional and are interested in the profession, please get in touch with our Institute to find out how to become qualified.

David Fu FCIS FCS(PE), President, The Hong Kong Institute of Chartered Secretaries Our profession has come a long way since 1949, the year that the first informal grouping of members of The Chartered Governance Institute was established. Whilst we celebrate our past with pride, we also look forward to the bright future of our profession. Our Institute has been working to better align our brand with the core value we bring to organisations – the achievement of excellence in governance. The majority of our members in Hong Kong and the Mainland have already transitioned to the dual Chartered Secretary and Chartered Governance Professional (CS/CGP) designation. Next up will be the transition to our new qualifying programme – the Chartered Governance Qualifying Programme (CGQP) – which replaces the International Qualifying Scheme (IQS) in January 2020 with an

updated curriculum in applied governance, company law, corporate secretaryship and compliance, as well as a greater emphasis on risk management, strategy and boardroom dynamics.

Governance standards and requirements are evolving rapidly to enhance better controls, performance, transparency and sustainability of organisations, and so is our profession. The CGQP, our thought leadership reports and guidance notes, as well as continuing professional development training courses, will deliver the reinforced skill set governance professionals need in the ever-more dynamic and regulated business environment. We believe that these new strategic developments will enhance the capabilities of our current and future members, the quality of what we do and the value we bring to all stakeholders.

We cannot predict the future but we can prepare for it together. Whilst our Council is fully committed to steering our Institute towards the sustainable development of our profession in Hong Kong and the Mainland, we need the continual support of our members, our collaborative partners and stakeholders in different ways. May I extend our deep appreciation to your contribution to us in the past and reach out to you for your continuing help and support.

I would also like to take this opportunity to thank our sponsors and donors for their generous support. We established The Hong Kong Institute of Chartered Secretaries Foundation Ltd on 5 January 2012 as a company limited by guarantee and a registered charity under Section 88 of the Inland Revenue Ordinance. Its main objectives are to support education and research in the company secretarial and governance arena and publish reports and

articles, organise or sponsor non-profit making training courses and educational programmes, as well as provide awards and scholarships to people in need to pursue studies in company secretarial and governance related subjects. Over the years, the Foundation has received donations and sponsorships from our members, graduates and students, friends and friendly organisations, and in particular the Companies Registry. To mark the 25th anniversary of the establishment of our Institute in Hong Kong, our Council has unanimously decided to donate HK$250,000 to the Foundation in support of its good work for the general public in the years to come.

Ada Chung, Registrar of Companies, Hong Kong Companies Registry; Edith Shih, International President, The Chartered Governance Institute; and David Fu, President, The Hong Kong Institute of Chartered Secretaries; were to speak at the HKICS Double Anniversary Cocktail Reception planned for 11 November 2019 at The Hong Kong Club.

David Fu, President, The Hong Kong Institute of Chartered Secretaries

our Institute has been working to better align our brand with the core value we bring to organisations – the achievement of excellence in governance

December 2019 20

In Focus

Competition law enforcementWhat can we learn from the first two competition law enforcement actions in Hong Kong?

December 2019 21

In Focus

• market share of the undertaking

• the undertaking’s power to make pricing decisions, and

• any barriers to entry to competitors into relevant markets.

Common examples of abuse of substantial market power include predatory pricing, tying and bundling, refusal to deal and exclusive dealing.

• as a member of an association of undertakings, make or give effect to such a decision of the association.

Common examples of anti-competitive conduct targeted by the First Conduct Rule include cartels, which usually involve price-fixing, bid-rigging, market sharing and/or output restrictions.

Second Conduct RuleThe Second Conduct Rule is set out in Section 21(1) of the CO. It prohibits an undertaking which has a substantial degree of market power in a market from abusing that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.

In determining whether an undertaking has a substantial degree of market power, the following matters listed in Section 21(3) of the CO will be considered:

Overview of the competition law regimeHong Kong joined over 130 jurisdictions around the world in having a cross-sector competition enforcement regime when the full provisions of the Competition Ordinance (Cap 619) (CO) came into force on 14 December 2015. The CO regulates or provides for the following:

1. agreements which may harm competition (the First Conduct Rule)

2. abuse of substantial market power (the Second Conduct Rule), and

3. merger control for the telecommunications industry (the Merger Rule).

The Competition Commission (the Commission) is the regulatory body in Hong Kong that brings enforcement actions to the Competition Tribunal (the Tribunal).

First Conduct RuleThe First Conduct Rule is set out in Section 6(1) of the CO. It provides that an undertaking (that is, any entity engaged in economic activity; see Section 2(1) of the CO) – if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong – must not:

• make or give effect to such an agreement

• engage in such a concerted practice, or

• the May 2019 Competition Tribunal judgments on the first two enforcement actions involving a breach of the First Conduct Rule have far-reaching implications for the attribution of liability

• not only can employees be treated as part of an undertaking, agents and subsidiaries may well also be treated as part of the undertaking of a principal or parent

• Hong Kong is currently the only common law jurisdiction that applies a criminal standard of proof in enforcement actions seeking a pecuniary penalty for contravention of competition law

Highlights

Connie HY Lee and Tommy Cheung, Barristers-at-Law, Des Voeux Chambers, consider the implications of Hong Kong’s first two competition law enforcement actions, with a focus on the attribution of liability.

undertakings, including natural persons, that contravene the rules may face serious consequences

December 2019 22

In Focus

Merger RuleThe Merger Rule is established by schedule 7 and takes effect pursuant to Section 162 of the CO. It prevents an undertaking from directly or indirectly carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. Nevertheless, the rule only applies where an undertaking that holds a carrier licence within the meaning of the Telecommunications Ordinance (Cap 106) is involved in a merger.

The significance of the competition law regimeThe significance of this new regime must not be overlooked.

First, the regime applies to all Hong Kong’s economic sectors, including the construction sector, the financial services industry, retail sectors, the telecommunications and broadcasting sector and the transport industry (see Conor Quigley QC and Suzanne Rab, Hong Kong Competition Law; Hart Publishing, 2017, Chapter 7).

Second, undertakings, including natural persons, that contravene the rules may face serious consequences. They could face pecuniary fines of up to 10% of the turnover (that is, revenue before deduction of expenses) during the period of contravention. If that contravention occurs for more than three years, the cap is at 10% of the turnover of the three years with the highest turnover (see Section 93(3) of the CO).

Third, natural persons involved in a contravention of the rules may also face pecuniary fines. The Tribunal can also seek a disqualification order of up to five years against directors of the companies

involved in the infringement (see Sections 101–102 of the CO).

The two enforcement actionsOn 17 May 2019, the Tribunal handed down its judgments on the first two enforcement actions involving a breach of the First Conduct Rule: (i) Competition Commission v Nutanix Hong Kong Ltd and Others [2019] HKCT 2 (the Nutanix decision), and (ii) Competition Commission v W Hing Construction Co Ltd and Others [2019] 3 HKLRD 46 (the W Hing decision).

The Tribunal ruled that the criminal standard of proof applies in enforcement actions seeking a pecuniary penalty for contravention of competition law. This set Hong Kong apart from the UK, Canada, New Zealand, Singapore and Australia as the only common law jurisdiction that applies a criminal standard of proof, in other words, beyond reasonable doubt. This is a very onerous standard for the Commission to meet. In particular, most competition law infringements are necessarily clandestine by nature.

These two landmark decisions also laid down many other significant rulings that have helped to shape the landscape of the new competition law regime. We will however focus on the doctrine of attribution of liability: (i) whether a rogue employee’s contravention can bind his/her employer, and (ii) whether an independent contractor’s contravention can bind a party.

The Nutanix decisionIn this first enforcement action, the Tribunal found all but one of the five respondents – each of which was an IT company – liable for contravening the First Conduct Rule by engaging in bid-

rigging concerning a tender for the supply and installation of a new IT server system for YWCA in 2016. In brief, ‘dummy bids’ were arranged to be submitted in order to assist BT Hong Kong Ltd’s bid.

This enforcement action has far-reaching implications for when liability of an employee can be attributed to an employer.

1. The conduct of submitting a dummy bid by a junior rogue employee of the third respondent (SiS International Ltd), whose general duties did not include submission of tenders nor provision of any binding quotation, was not attributable to SiS (see paragraphs 375 to 377 of the Nutanix decision).

2. In reaching this decision, the Tribunal formulated a somewhat new test for attribution of liability in Hong Kong, that is, the ‘sufficient connection’ test, stating that: ‘There must be a sufficient connection between the acts of the employee in question and the undertaking so that the former can properly be regarded as part of the latter in the relevant context’ (see paragraph 372 of the Nutanix decision).

The W Hing decisionThe Commission brought the second enforcement action against 10 decoration contractors approved by the Hong Kong Housing Authority (HKHA) for decoration works of three new blocks of flats in public housing estates. The Commission’s case was that the 10 respondents had allocated the floors they would work on and had used a joint flyer setting out basic packaged prices in providing decoration works in Phase 1 of On Tat Estate between June and November 2016.

December 2019 23

In Focus

All respondents – except the first respondent (W Hing) and the ninth respondent (Wide Project Engineering & Construction Co) – initially relied on the economic efficiency defence under Section 1 of schedule 1 to the CO. On the other hand, W Hing and Wide Project relied on the subcontractor defence in that they had subcontracted the entirety of the works to respective independent contractors for their own profit and loss, in exchange for a fee of HK$200,000.

The Tribunal ruled that all respondents were liable for the contravention of the First Conduct Rule in the form of market sharing and price-fixing. In so ruling, the Tribunal also rejected the economic efficiency defence and the subcontractor defence.

Key lessons from the two enforcement actionsNotwithstanding the fact that some of the respondents in the first two enforcement actions are appealing against the decisions, the decisions have nevertheless provided important pointers for compliance purposes and internal control.

Corporate entities in Hong Kong must familiarise themselves with the concept

of an ‘undertaking’ as the perpetrator of a contravention of competition law that underpins the limits of an enforcement action. It is a very broad concept and can encompass several entities or even legal persons within an economic unit (see Akzo Nobel and Others v European Commission (C-97/08P) [2009], paragraphs 55–56; Sasol and Others v European Commission (re Candle Wax Cartel) (T-541/08) [2014] 5 CMLR 16, paragraphs 139–140). Not only are employees usually being treated as part of an undertaking, agents and subsidiaries may well also be treated as part of the undertaking of a principal or parent.

In the context of an employment relationship, an employer who has no knowledge of, or who has not authorised, a contravention carried out by an employee will only be able to escape liability if the employee’s duties had no sufficient connection with the acts that led to the contravention. In other words, the employee was clearly not put up to the very task in question.

Likewise, a party cannot disclaim liability by simply outsourcing the relevant works. The determining factor is whether there is unity in the conduct of the

relevant entities on the market. In the W Hing decision, the Tribunal held that, amongst others, the renovation work was promoted to the tenants in the name of W Hing and Wide Project, and the contracts with the tenants were also executed in the name of W Hing and Wide Project, who remain ultimately answerable to the HKHA. Therefore, W Hing, Wide Project and their respective subcontractors had to ‘act together’ in the provision of renovation services such that there was unity in their conduct on the market (see paragraph 317 of the W Hing decision).

In order to protect companies and employers, proper internal monitors and compliance procedures must be in place. There must be training for both management and staff in the major pitfalls related to competition law, and specific directives on these compliance or regulatory matters must be issued. Crucially, companies should only place people they can trust in important positions that provide access to sensitive information, including price information.

Connie HY Lee, Barrister-at-Law, and Tommy Cheung, Barrister-at-Law

Des Voeux Chambers

corporate entities in Hong Kong must familiarise themselves with the concept of an ‘undertaking’ as the perpetrator of a contravention of competition law that underpins the limits of an enforcement action

International Report

December 2019 24

US-China trade war: responding to uncertaintyColum Bancroft, Managing Director, AlixPartners, looks at the risks and compliance issues arising from market conditions resulting from the current US-China trade war.

International Report

December 2019 25

The US-China trade war has caught the world’s attention in recent months,

and even more so recently with both the US and China continuing to increase tariffs on various categories of each other’s products. Because of the inability to pass on the additional tariff costs fully to consumers, the profit margins of multinational companies’ Chinese subsidiaries and Chinese exporting businesses are being squeezed, and pressure is on both managers and executives to meet internal and external targets.

Combined with the deleveraging of the Chinese economy, the expansion of tariffs creates a perfect storm of tension, leading to a marked increase in channel stuffing, round-tripping, falsified transactions, and other illicit means of inflating reported revenues and earnings. Companies must be prepared for the risks and compliance issues that may arise as attempts are made to reduce the impact from tariffs. One example of a method some companies are employing and its potential financial and compliance implications follows.

Selling goods through an intermediarySome exporters, in order to manage and reduce the additional costs relating to

the tariffs, are coordinating with US importers. The arrangement may involve the China exporter setting up a trading company (the intermediary), or using an independent trading company (often based in Hong Kong), to sell its goods to the intermediary at a lowered price. This lower price is subjected to the 25% tariff duties which results in an effective lowered duty paid via the First Sale for Export programme. The First Sale for Export is a duty reduction programme designed to reduce the dutiable value of eligible products imported into the US and not the final price purchased by the US importer.

Instead of selling direct to the end customer, the exporters may sell

• companies need to remain agile and adept at identifying the ever-evolving risks to their businesses as a result of the tariff increases

• regular enterprise-wide risk assessments – together with ad hoc reviews – need be performed as part of a robust compliance programme

• boards of directors, audit committees and others charged with oversight need to be kept informed of key market and other developments impacting the business

Highlights

companies must continually monitor the evolving risk landscape in order to maintain an effective compliance programme

International Report

December 2019 26

Due to the inherent bribery, misappropriation of assets, financial fraud and OFAC sanctions-related risks associated with the use of intermediaries, companies must continually monitor the evolving risk landscape in order to maintain an effective compliance programme.

Such a programme should include inculcating an organisation-wide culture of compliance through setting an appropriate tone-at-the-top and adequate training tailored to the business and appropriate to the position and seniority of those being trained, and holding individuals accountable for compliance failures. Also maintaining a robust third-party oversight programme, including appropriate levels and frequency of risk-based due diligence procedures conducted throughout the

products to an intermediary without knowing who the final customers are. Regulatory enforcement actions emphasise that compliance cannot be outsourced to third parties, with circumvention of regulations through third parties often expressly prohibited by statute. This places the onus on companies to take reasonable steps to ensure their supply chains and distribution channels remain compliant. Although the onward sales may not be subjected to the trade tariffs, if the products are ultimately sold to sanctioned countries or sanctioned persons, the exporters could end up in breach of the Office of Foreign Assets Control (OFAC) regulations. If an OFAC violation is confirmed, the penalties could be significantly higher than the premium paid on trade tariffs.

Table 1: Before any tariffs

A (SELL SIDE) B (BUY SIDE)

Price sold – Cost, insurance and freight (CIF)

100 200

Cost of goods sold (COGS) -100

Other costs -75

Profit 25

Table 2: Tariffs at 25%

A (SELL SIDE) B (BUY SIDE)

Price sold (CIF) 100 200

COGS -100

Tariffs @ 25% -25

Other costs -75

Profit 0

Table 3: Tariffs at 25% (using an intermediary)

A (SELL SIDE) INTERMEDIARY B (BUY SIDE)

Price sold (ex-factory) 80 100 200

Insurance and freight 20

COGS 80 -100

Tariffs @ 25% (of 80) -20

Other costs -75

Profit 5

supply chain and distribution channels, again with suitable consequences for lapses in third-party supervision.

In addition, and of particular importance in an environment of rapidly changing rules, regulations and market trends is the need for companies to remain vigilant and constantly monitor such changes and assess their impact on the entire range of financial, legal and regulatory risk exposure of the business – including, but not limited to, fraud, corruption, AML, sanctions, and data privacy and handling. Such ad hoc reviews should supplement the regular enterprise-wide risk assessments that need be performed with appropriate frequency as part of a robust compliance programme to ensure that the company’s risk exposure is aligned with its board-approved risk appetite.

International Report

December 2019 27

knowledge of consultants who, through a combination of specialist expertise and use of cutting-edge technology, can provide real insight to help senior leaders to make fully informed decisions.

Only time will tell if US or Chinese consumers or companies will bear the brunt of the tariffs, but companies based in both locations need to remain agile and adept at identifying the ever-evolving risks to their businesses, and take actions to mitigate uncertainty and the impact of tariff increases.

Colum Bancroft, Managing DirectorAlixPartners

Prepare nowBoth US and Chinese companies are facing a rough road ahead. The current market conditions make it difficult to understand how best to adjust short-, medium- and long-term plans in order to meet strategic objectives. A holistic approach is necessary to assess and respond to the regular and rapidly changing economic environment and risk landscape, and will require an evaluation of a wide range of strategic, operational, financial and other factors – including possible changes to operating models, trading terms, supply chain transparency, and steps taken to ensure compliant

mergers and acquisitions and business-as-usual activity.

In the current macro environment, it is more important than ever that boards of directors, audit committees and others charged with oversight have sufficient understanding of the company’s business model, revenue and profitability drivers, as well as the accompanying risks and other dependencies, and are kept informed of key market and other developments impacting the business, to enable a strong governance structure to function effectively. Businesses should also consider drawing upon the combination of risk management experience and deep industry

December 2019 28

Mainland Report

Changes on the horizonNew cross-border transfer restrictions and personal information requirements in the Mainland

December 2019 29

Mainland Report

Gabriela Kennedy, Partner, and Karen HF Lee, Counsel, Mayer Brown, discuss the implications of new draft measures that relate to China’s Cybersecurity Law, and the resultant stricter regulations and requirements, notably regarding cross-border transfers of personal information and important data.

particularly regarding the cross-border transfer of personal information and important data.

ApplicationThe CSL applies to critical information infrastructure (CII) operators and network operators in China. CIIs include key sectors such as finance, transportation, utilities (such as energy and water), government and communications, and any other industries that the Chinese authorities identify as having the potential to cause serious damage to national security, national economy, people’s livelihoods and public interests in the event they suffer a security breach leading to any destruction, loss of function or data. In the past year or so, additional sectors that have been identified by the Chinese authorities as falling into the CII category include media, e-commerce, e-payment, search engines, emails, blogs, cloud computing, enterprise systems and big data.

• China has issued new draft measures for data security management and security assessment of cross-border transfer of personal information

• the proposed new restrictions appear to have extraterritorial effect and may apply to companies without a physical presence in China, but which involve the collection of personal information of Chinese residents

• personal information or important data collected or generated during operations in China cannot be transferred or disclosed to anyone outside China, unless an official security assessment is conducted prior to the cross-border data transfer

Highlights

Despite being brought into force over two years ago, uncertainty remains

regarding the application of China’s Cybersecurity Law (CSL). This largely stems from the fact that many of the supplemental measures and guidelines issued by the Chinese authorities still remain in draft format.

On 28 May 2019 and 13 June 2019, respectively, the new draft Measures for Data Security Management (New Draft Security Management Measures) and the new draft Measures on Security Assessment of the Cross-Border Transfer of Personal Information (New Draft Cross-Border PI Measures) were issued for public consultation. These recent drafts appear to depart significantly from the draft Security Assessment Measures for the Cross-Border Transfer of Personal Information and Important Data, issued in 2017. More stringent and detailed requirements now appear to be the norm,

December 2019 30

Mainland Report

As far as network operators are concerned, the definition is broad enough to essentially include any business that uses some form of IT infrastructure in China (that is, owns or operates a computer network, server or website in China), regardless of its industry sector.

Transfers of personal information and important dataUnder the New Draft Cross-Border PI Measures and the New Draft Security Management Measures, a CII operator or network operator cannot transfer or disclose personal information or important data collected or generated during their operations in China to anyone outside China, unless:

• they have completed an official security assessment

• a contract is signed with the intended recipient (which must incorporate specific provisions stipulated by the New Draft Cross-Border PI Measures), and

• for personal information, the express and informed consent of the relevant individual is obtained.

In addition, prior authorisation from the relevant regulatory authority is also required for the cross-border transfer, disclosure, sale or publishing of important data by CII operators or network operators. The definition of ‘important data’ under the New Draft Security Management Measures only covers data – such as non-public government information, large-scale population data, genetic health data, geographic data and mineral resources data – which, if leaked, may directly affect national security, economic security, social stability, and

public health and security. The definition expressly excludes any information relating to the production, operation or internal management of an entity and personal information.

The above restrictions appear to have extraterritorial effect and may apply to companies that do not have a physical presence in China, but which have operations that involve the collection of personal information of Chinese residents. In particular, the New Draft Cross-Border PI Measures provide that if the business activities of any organisation located outside China results in the collection of personal information of persons located in China, then such organisation will be subject to the New Draft Cross-Border PI Measures as a network operator.

Under the previous draft measures, CII operators and network operators were required to carry out a self-assessment for the cross-border transfer of personal information, and an official security assessment by the relevant local authorities would only be necessary if certain thresholds were met or the transfer was being made by a CII operator. In contrast, the New Draft Cross-Border PI Measures now require all cross-border transfers of personal information by either a CII operator or network operator to undergo an official security assessment by the relevant Cyberspace Administration of China (CAC) branch office. There is currently no minimum threshold in relation to the application of this requirement. In addition, no express exceptions are made in relation to intra-group transfers.

The official security assessment must be conducted prior to the cross-border data transfer, and must be completed for each

different recipient. However, multiple or ongoing transfers to the same recipient will not require additional assessments. The assessment must be repeated every two years or whenever there is a change in the purpose, type or retention period regarding the data.

The documents that must be submitted by the CII or network operator when applying for an official security assessment will include a detailed report on the security risks and measures related to the transfer, the agreement with the intended recipient and a declaration form. If the results of the assessment reveal that the cross-border transfer could present a risk to national security, damage public interest or provide inadequate protection for the personal information, then the transfer will be prohibited. Whilst the CII or network operator can file an objection to the decision, there is currently no detailed appeal procedure set out in the New Draft Cross-Border PI Measures.

A record must be retained by CII operators and network operators for at least five years, which details all of their cross-border transfers of personal information. The local CAC office is obligated to carry out regular inspections of such records, and an annual report must also be submitted to the local CAC office regarding the CII or network operator’s cross-border transfers and any related contract.

Lastly, prior to the sharing of personal information with a third party, under the New Draft Security Management Measures CII operators and network operators need to conduct an assessment of the potential security risks and obtain the express consent of the data subjects. This requirement is not expressly limited

December 2019 31

Mainland Report

more stringent and detailed requirements now appear to be the norm, particularly regarding the cross-border transfer of personal information and important data

purpose, scope, volume, method, type and retention period of such data. The CII operators and network operators must also designate a person to be in charge of the data security for the important data and sensitive personal information.

Where to now?The draft measures are likely to be finalised by the end of 2019. For now, companies that have a link to China (for example, business operations in China, networks in China, collecting information from Chinese residents, Chinese-hosted website, or vendors in China), are advised to conduct privacy and security audits to ensure compliance with the CSL. In particular, companies should carefully scrutinise where their data is held and engage in conversations with their supply chain.

Gabriela Kennedy, Partner, and Karen HF Lee, Counsel

Mayer Brown

Copyright © Mayer Brown

Draft Security Management Measures (once finalised and brought into operation) will be legally binding and a breach could lead to various penalties (including the shutting down of business operations). The New Draft Security Management Measures introduce requirements such as the need to obtain explicit and informed consent of the data subjects (and specifically sets out the information that needs to be provided to the data subject), an obligation not to force or mislead data subjects to provide their consent (such as bundled consent or default consent), not to take any discriminatory actions based on the scope of consent provided by the data subject (for example, reduced service quality), comply with data access requests, implement data encryption and backup measures, and so on.

In addition, CII operators and network operators that collect important data or sensitive personal information for business purposes must also file with their local CAC office their rules for collection and use, and the

to cross-border transfers and does not exclude intra-group sharing of personal information – therefore it appears that it may also apply to domestic transfers and transfers within the same group. There are certain exceptions to this requirement, including situations where the data was collected from a public source and the sharing is not in violation of the data subjects’ wishes, the data subject voluntarily published his personal information, it is necessary for law enforcement purposes or to protect national security, and so on.

Personal informationOutside the context of cross-border transfers, the New Draft Security Management Measures impose further obligations on CII operators and network operators in relation to personal information. Unlike the ‘Information Technology – Personal Information Security Specification’ (National Standard GB/T 35273-2017) (GB/T 35273-2017 信息安全技术个人信息安全规范) (PI Specification), and its draft amendments released on 1 February 2019, the New

Technical Update

December 2019 32

Charitable organisationsRegistration of a charity in the form of a company limited by guarantee

December 2019 33

Technical Update

IntroductionA non-governmental organisation (NGO) or a non-profit organisation (NPO) is frequently used as an alternative description for a charitable organisation. However, in Hong Kong not all NGOs or NPOs (collectively described as NPOs below) are recognised by the Hong Kong Inland Revenue Department (IRD) as charitable organisations under Section 88 of the Inland Revenue Ordinance (IRO). This article examines how the IRD defines a charitable organisation (charity) in Hong Kong, the advantages of forming a company limited by guarantee (guarantee company) for charity purposes, the key statutory requirements relating to the registration of a guarantee company as a charity in Hong Kong, and the ongoing administration of such.

What constitutes a charity?A charity is not exactly equivalent to an NPO, but a charity must be an NPO.

According to a tax guide issued by the IRD, a charity must be established for public benefit and for purposes that are exclusively charitable according to the law. Charitable purposes are classified into four areas:

• relief of poverty

• advancement of education

• advancement of religion, and

• other purposes of a charitable nature beneficial to the Hong Kong community.

Susan Lo FCIS FCS(PE), Executive Director of Corporate Services, Tricor Services Ltd, reviews the interpretation of a charitable organisation in Hong Kong, and explains the benefits and stipulations of forming a company limited by guarantee for charity purposes.

• a charitable purpose must fall into one of four categories: relief of poverty, advancement of education, advancement of religion, or being of benefit to the Hong Kong community

• the most popular vehicle for establishing a charity is currently a company limited by guarantee (guarantee company)

• best practice recommendations relating to the registration of a guarantee company as a charity include compliance with statutory terrorist financing obligations

Highlights

While the purposes under the first three categories may be in relation to activities carried out in any part of the world, those under the fourth category will only be regarded as of charitable purpose if the activities are of benefit to the Hong Kong community.

Examples of charitable purposes and non-charitable purposes upheld by the courts in past cases are set out below for reference.

Charitable purposes• relief of people living in poverty

• relief of victims of a particular disaster

• relief of sickness

• relief of the physically and mentally disadvantaged

• establishment or maintenance of non-profit-making schools

• provision of scholarships

• diffusion of knowledge of particular academic subjects

• establishment or maintenance of a church

• establishment of religious institutions of a public character

• prevention of cruelty to animals, or

• protection and safeguarding the environment or countryside.

Non-charitable purposes• attainment of a political object

• promotion of the benefits of founders or subscribers

• provision of a playing field, recreation ground or scholarship fund for employees of a particular company or industry, or

• encouragement of a particular sport such as angling or cricket.

December 2019 34

Technical Update

• prohibiting distribution of the entity’s income and properties amongst its members

• prohibiting members of the entity’s governing body (for example, directors) from receiving remuneration

• specifying how the remaining assets should be dealt with upon dissolution (normally to be donated to other charities)

• avoiding conflict of interests in contract, arrangement and transaction, and

• requiring the keeping of sufficient records of income and expenditure (including donation receipts), proper accounting books and compilation of annual financial statements.

If the IRD has any comments on the articles of association, the entity has to pass members’ resolutions to amend the articles and resubmit the same for IRD approval. Many applicants, therefore, prefer to obtain IRD approval before formally incorporating the entity. After all conditions are fulfilled, the IRD will issue a written confirmation and include the entity’s name in the list of charitable institutions and trusts of a public character recognised by the IRD as exempt from tax under Section 88 of the IRO, which is publicly accessible on the IRD’s website. The whole process may take at least four to six months.

The tax advantages accorded to the charity include exemption from paying profits tax on all the income to be applied for charitable purposes, and exemption from stamp duty on transfer

Why use a guarantee company as a vehicle for a charity?An organisation wishing to set up as a charity is subject to the jurisdiction of the courts in Hong Kong. The following are the common types of structure:

• a trust

• a society established under the Societies Ordinance (Cap 151)

• a guarantee company incorporated under the Companies Ordinance (Cap 622)(CO), and

• a statutory body incorporated under a specific Hong Kong Ordinance.

Of the above, the most popular vehicle for establishing a charity in recent years is a guarantee company. The key advantage is that this is a legal entity separate from its members, and the personal finances of the members running the charity are protected. The liability of its members is limited to the sum that they agree to contribute in the event of the charity being wound up. Setting up a guarantee company also paves the way for a clearer process for registration with the IRD and offers greater transparency of operation.

Registration of a charity in the form of a guarantee companyRegistration of a charity in the form of a guarantee company is a two-step process.

For the purpose of incorporating the entity, the draft incorporation statutory returns and the draft articles of association, together with the appropriate incorporation and business registration fees, should be submitted to the Companies Registry (CR). There are no e-incorporation services available for such applications as the Registrar has to review the draft articles of association before giving approval for the incorporation. To have such an entity incorporated typically takes four to five weeks, even for a very smooth case.

An entity wishing to seek tax exemption status accorded by Section 88 of the IRO should submit to the IRD an application prior to or immediately after the entity has been incorporated. In addition to an application letter, the entity should also submit its certificate of registration, articles of association, list of directors, financial statements (if available) and list of the activities planned for the next 12 months from the date of establishment or date of application, as appropriate. In case the application is made prior to the entity’s incorporation, the draft articles of association and the list of proposed directors should be submitted instead. The IRD will review the entity’s articles to ensure that the following criteria are satisfied:

• stating precisely and clearly the entity’s objectives

• limiting the application of the entity’s funds towards the attainment of its stated objectives

a charity must be established for public benefit and for purposes that are exclusively charitable according to the law

December 2019 35

Technical Update

• maintain proper accounting records and prepare annual financial statements

• appoint a practising accountant to audit the annual financial statements

• hold an annual general meeting at which the company’s financial accounts are adopted

• file annual returns with the CR, and

• submit a profits tax return together the annual audited accounts to the IRD.

Guarantee company. Highlighted below are the key provisions applicable only to a guarantee company:

• must maintain at least two directors, and all of its directors must be natural persons

• may apply to the CR for a licence to dispense with the word ‘Limited’ or ‘有限公司’ if the Registrar is satisfied that its objectives are restricted to

of any immovable property or Hong Kong stock gifted to the charity and the annual business registration fee. In addition, the donors are granted a tax deduction from salaries or profits to the extent of the respective limitations.

It is vital that the charity does not start receiving donations until after the Section 88 tax exemption status has been granted, to avoid such income being subject to profits tax.

General compliance and annual filing requirements for guarantee companiesUnder the CO, the statutory requirements that need to be observed by a guarantee company are similar to those applicable to a private limited company.

Private limited company. Set out below for reference are some basic compliance obligations for a private limited company, which also apply to guarantee companies, except for those provisions applicable only to a guarantee company:

• maintain a local registered address

• appoint a resident company secretary (individual or body corporate)

• appoint at least one director who is a natural person (over 18 years old)

• have at least one shareholder (individual or body corporate)

• notify the CR of any changes in the company’s particulars recorded in the CR

• renew its annual business registration

promoting commerce, art, science, religion, charity, and so on, and its profits are all applied to promoting objectives and no dividend payment would be made to its members

• must submit an annual return to the CR together with certified true copies of the relevant financial statements, directors’ report and auditor’s report within 42 days after the annual return date, which is nine months after the end of the company’s accounting reference period, and

• need not pay the business registration fee or file a profits tax return with the IRD (if it has been recognised as a charity).

Although a charity is exempted from filing a profits tax return with the IRD, the IRD may conduct a periodic review of its charitable status.

Preventing the misuse of charities for terrorist financingHong Kong is a member of the Financial Action Task Force (FATF), which sets international standards on combating

setting up a guarantee company also paves the way for a clearer process for registration with the Inland Revenue Department and offers greater transparency of operation

December 2019 36

Technical Update

money laundering (ML) and terrorist financing (TF). The Narcotics Division of the Security Bureau has issued ‘An Advisory Guideline on Preventing the Misuse of Charities for Terrorist Financing’ in order to mitigate any possible threat and to preserve the integrity of Hong Kong’s charity sector. However, the risk of most charities in Hong Kong being abused for terrorist purposes is regarded as low, as

programming and funding control and practices to mitigate ML and TF risks.

The ‘Public Governance’ series of guidance notes published by The Hong Kong Institute of Chartered Secretaries (see online resources below) give practical guidance on the governance of charitable organisations in Hong Kong. To guide charities to maintain good fund-raising management and good accounting practices, practice notes are also issued by the Social Welfare Department, the Home Affairs Department and the Food and Environmental Hygiene Department, and by the Independent Commission Against Corruption.

Susan Lo, Executive Director, Corporate Services

Tricor Services Ltd

all charities are encouraged to demonstrate an understanding of money laundering and terrorist financing risks to which the organisation may be exposed

assessed in the HKSAR Government’s Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report.

All charities are encouraged to demonstrate an understanding of ML and TF risks to which the organisation may be exposed, as well as the statutory TF obligations, and to elaborate on the organisation’s measures of good governance and donations,

• Inland Revenue Department tax guide: ‘Tax Guide for Charitable Institutions and Trusts of a Public Character’ is available at: https://www.ird.gov.hk/eng/pdf/tax_guide_for_charities.pdf

• Companies Registry guidance note: ‘Application for a Licence to dispense with the word “Limited” in the Name of a Company’ is available at: https://www.cr.gov.hk/en/companies_ordinance/docs/Guide_Section103-e.pdf

• Narcotics Division, Security Bureau advisory guideline: ‘An Advisory Guideline on Preventing

Online resources (in order of appearance)

the Misuse of Charities for Terrorist Financing’ and related Appendix are available at: https://www.nd.gov.hk/pdf/guideline_e_20180929.pdf https://www.nd.gov.hk/pdf/Appendix_e_20180929.pdf

• HKSAR Government risk assessment report: Hong Kong Money Laundering and Terrorist Financing Risk Assessment Report is available at: https://www.fstb.gov.hk/fsb/aml/en/doc/hk-risk-assessment-report_e.pdf

• The ‘Public Governance’ series of guidance notes published by The Hong Kong Institute of Chartered Secretaries is available at: www.hkics.org.hk

• Social Welfare Department, Home Affairs Department and Food and Environmental Hygiene Department good practice guide: ‘Good Practice Guide on Charitable Fund-raising’ is available at: https://www.gov.hk/en/theme/fundraising/docs/good_practice_guide.pdf

• Independent Commission Against Corruption best practice checklist: ‘Management of Charities and Fund-Raising Activities’ is available at: http://www.icac.org.hk/filemanager/en/content_218/fund_raising.pdf

December 2019 37

Technical UpdateA bird’s eye view

Company secretaries need to be proficient

in a wide range of practice areas. CSj,

the journal of The Hong Kong Institute of

Chartered Secretaries, is the only journal

in Hong Kong dedicated to covering these

areas, keeping readers informed of the

latest developments in company secretarial

practice while also providing an engaging

and entertaining read. Topics covered

regularly in the journal include:

Subscribe to CSj today to stay informed and engaged with the issues that matter to you most.

CSj, the journal of The Hong Kong Institute of Chartered Secretaries (www.hkics.org.hk), is published 12 times a year by Ninehills Media (www.ninehillsmedia.com).

• regulatory compliance

• corporate governance

• corporate reporting

• board support

• investor relations

• business ethics

• corporate social responsibility

• continuing professional development

• risk management, and

• internal controls

Please contact:Paul Davis on +852 3796 3060 or paul@ninehillsmedia.com

CSJ-sub-fullpage-2018.indd 1 8/4/19 6:25 pm

December 2019 38

Technical Update

Tax residency of Hong Kong corporationsWhat you need to know before applying for a Certificate of Resident Status in Hong Kong

December 2019 39

Technical Update

qualify as a Hong Kong tax resident. As such, it was not difficult for a Hong Kong corporation to obtain a CoR.

However, in recent years – as many of you may be aware – following the international practice of avoiding treaty abuse and treaty shopping, the IRD now expects a corporation to build up substance in Hong Kong in order to qualify as a Hong Kong tax resident. In other words, a shell company without substance in Hong Kong is likely to be rejected by the IRD when making a CoR application.

The ‘Departmental Interpretation and Practice Notes No 43 (Revised)’ (DIPN 43) provides some of the IRD’s latest views. In order to be a Hong Kong tax resident, a corporation has to be centrally managed and controlled in Hong Kong. Under DIPN 43, the IRD does not specify the exact amount of substance required,

Given Hong Kong’s increasing network of Double Taxation Agreements/

Arrangement (DTAs), obtaining a Certificate of Resident Status (CoR) in Hong Kong in order to utilise the tax benefits under a DTA has become an important part of tax planning for multinational corporations and Chinese enterprises. Meanwhile, the Inland Revenue Department (IRD) of The Government of the HKSAR is taking a stricter approach when reviewing CoR applications. As such, it is important to understand the definition of a Hong Kong tax resident and the prevailing practice of the IRD before making a CoR application.

Definition of a Hong Kong tax residentSeveral years ago, following the definitions stated in the DTA entered into by Hong Kong, being a Hong Kong incorporated company was sufficient to

Henry Kwong, Tax Partner, and Matthew Cheung, Tax Manager, Cheng & Cheng Taxation Services Ltd, guide us through the process of obtaining a Certificate of Resident Status in Hong Kong, a prerequisite for eligibility to claim tax benefits under a Double Taxation Agreement/Arrangement.

• before being eligible to claim tax benefits under a Double Taxation Agreement/Arrangement (DTA), a corporation should obtain a Certificate of Resident Status (CoR) in Hong Kong

• Hong Kong’s Inland Revenue Department is now taking a stricter approach when reviewing CoR applications, requiring that a corporation is centrally managed and controlled in Hong Kong

• while a CoR is ordinarily valid for one year, in respect of the DTA between Hong Kong and the Mainland – and provided that the operations of the Hong Kong company remain substantially unchanged – validity is generally three years

Highlights

December 2019 40

Technical Update

but will look at all facts regarding the management and operations of the applicant company in order to make a decision. It has also explicitly stated that the place of incorporation is not itself conclusive proof of where the central management and control is exercised.

Tax benefits under a DTABefore we go into the detailed requirements of a CoR application, it would be fruitful to first examine the scenarios under which a CoR would be beneficial to a corporation. A Hong Kong tax resident would be better off if the tax liabilities stated in the DTA were less than that stated in domestic law. As at 30 September 2019, Hong Kong had entered into Comprehensive DTAs with 42 tax jurisdictions, including Japan, the United Kingdom and Indonesia. Please refer to the IRD’s website for the full list of Hong Kong tax treaty partners.

Having said that, the most common DTA applicable to a Hong Kong corporation must be that between Hong Kong and the mainland of China (the Mainland). Table 1 summarises the differences in withholding tax rates on dividends, interest and royalty payments made by Mainland corporations to Hong Kong corporations, with and without the DTA.

These figures partly explain the reason

why multinational corporations opt to set up a Hong Kong holding company to invest in the Mainland. If a Hong Kong holding company qualifies as a Hong Kong tax resident and fulfils the Beneficial Ownership requirement under the Mainland’s Public Notice [2018] No 9, it is highly likely that the Hong Kong holding company can enjoy a preferential tax rate of 5% on dividends received from its Mainland subsidiaries.

The preferential tax rate also applies to Mainland enterprises listing on the Hong Kong Stock Exchange. In the common red chip structure, a Hong Kong company would be set up to hold shares of Mainland operating entities. One of the main purposes for setting up a Hong Kong holding company is to reduce the withholding tax rate from 10% to 5% for profit repatriation from the Mainland to Hong Kong. The 5% withholding tax reduction would have a significant impact on the final amount of dividends receivable by investors.

On the other hand, Hong Kong corporations licensing its trademarks, licences or other intellectual properties to Mainland corporations can also enjoy a reduced withholding tax rate if it qualifies as a Hong Kong tax resident.

Other taxation benefits made possible

through obtaining CoR status are the elimination of double taxation and a more favourable definition of permanent establishment in the DTA.

Practical experience sharingAs mentioned above, the IRD will look at the place in which the central management and control of a corporation is exercised in order to determine whether a corporation is a Hong Kong tax resident or not. Based on our experience, the IRD will look at the following aspects when reviewing a CoR application:

• whether the directors of the corporation are based in Hong Kong

• whether the board of directors’ meetings of the corporation are held in Hong Kong (that is, physical location of the directors at the time of the meeting will be taken into consideration)

• whether the corporation maintains an office and/or any other business establishment in Hong Kong

• whether the staff (particularly senior management personnel) of the corporation are based in Hong Kong, and

• whether the profits of the corporation are subject to Hong Kong profits tax.

As the IRD will consider all facts relevant to the management and control of the corporation as a whole, the above list is not intended to be exclusive and at the same time a corporation may not have to fulfil all of the above requirements to qualify as a Hong Kong tax resident. For

Withholding tax Without DTA With DTA

Dividends 10% 5%

Interest 10% 7%

Royalties 10% 5%–7%

Table 1: Withholding tax rates

December 2019 41

Technical Update

and the Mainland is generally valid for three years, provided that the operations of the Hong Kong company remain substantially unchanged.

It takes around 21 business days for the IRD to process a CoR application. Should the IRD consider that it needs additional information and supporting documents to make a decision, it will issue an enquiry letter to the applicant. At that stage, the IRD does not provide a specific timeframe for reviewing the applicant’s reply to the enquiry letter.

In view of the above, it is advised that:

• sufficient information and supporting documents should be submitted to the IRD with the initial application in order to avoid any delay in the application process, and

• as the CoR for the DTA between Hong Kong and the Mainland is valid for three years, an application for a

each of the above factors, the IRD will first examine whether the corporation has built up the relevant substance in Hong Kong, and will then compare the substance built up by the corporation in Hong Kong and other tax jurisdictions.

Administrative proceduresApplications for a CoR are made on a calendar year basis, regardless of the accounting year-end date of the applicant. If the applicant would like to obtain the tax benefits under two separate DTAs, two separate applications have to be made, despite the fact that the requirements will be more or less the same. Application forms IR1313A (applicable to the DTA between Hong Kong and the Mainland) and IR1313B (applicable to all other DTAs entered into by Hong Kong) should be filled in and submitted to the IRD.

A CoR is generally valid for one year. To ease the administrative burden, a CoR in respect of the DTA between Hong Kong

the Inland Revenue Department now expects a corporation to build up substance in Hong Kong in order to qualify as a Hong Kong tax resident

new CoR could be submitted well in advance, to allow a sufficient buffer time in the application process.

Last piece of adviceBased on our experience, a failed application renders it more difficult for a corporation to successfully obtain a CoR in the future, while a successful application tends to make future applications easier.

As such, we encourage corporations to look for tax advisors to examine whether the current status of the corporation would qualify it as a Hong Kong tax resident or not. If insufficient substance is maintained in Hong Kong, to enhance the chance of success, tax planning should be carried out before submitting a CoR application to the IRD.

Henry Kwong, Tax Partner, and Matthew Cheung, Tax Manager

Cheng & Cheng Taxation Services Ltd

December 2019 42

Institute News

Professional Development

10 October Taking a closer look at the state of governance in Hong Kong and the Mainland

Stella Lo FCIS FCS(PE), Institute Council member and Membership Committee Chairman, and Group Company Secretary, Guoco Group LtdPeter Greenwood MA FCIS FCS, Institute Technical Consultation Panel member, and Former Executive Director, CLP Holdings Ltd

Seminars: October and November 2019

22 October Listco 101: how to tackle queries from short sellers, auditors and regulators

Frances Chan FCIS FCS, Institute Professional Services Panel member, and Founder and Director, K. Leaders Business Consultants LtdBarry Tong, Partner, Advisory, Grant Thornton Advisory Services Ltd

Chair:

Speaker:

23 October Tax residency certificate application and PRC individual income tax update

Jerry Tong FCIS FCS(PE), Institute Education Committee member, and Financial Controller and Company Secretary, Sing Lee Software (Group) LtdHenry Kwong, Tax Partner, Cheng & Cheng Taxation Services Ltd

Chair:

Speaker:

Chair:

Speaker:

14 October Major BVI legal and practice developments in 2019

Richard Leung FCIS FCS JP, Institute Past President, and Barrister-at-law, Des Voeux ChambersStephen Briscoe, Director, FFP (BVI) Ltd

15 October Hong Kong resident status – a swinging pendulum?

Eric Chan FCIS FCS(PE), Chief Consultant, Reachtop Consulting LtdWilson Cheng, Partner, Hong Kong Business Tax Services/Tax Controversy Services; and Cherry Lam, Partner, International Tax Services; Ernst & Young Tax Services Ltd

Chair:

Speaker:

Chair:

Speakers:

28 October Company secretarial practical training series: continuing obligations of listed company: practice and application (re-run)

Carmen Lam FCIS FCS, Senior Lecturer, Corporate Administration and Secretaryship/Secretarial Practice, The Open University of Hong KongRicky Lai FCIS FCS, Company Secretary, HKC (Holdings) Ltd

Chair:

Speaker:

December 2019 43

Institute News

Online CPD seminarsFor details, please visit the CPD section of the Institute’s website: www.hkics.org.hk. For enquiries, please contact the Institute’s Professional Development Section: 2830 6011, or email: cpd@hkics.org.hk.

Date Time Topic ECPD points

18 December 2019 6.45pm–8.45pm Sexual harassment in the workplace 2

6 January 2020 6.45pm–8.15pm The role of Hong Kong notaries public in helping business and citizens 1.5

8 January 2020 6.45pm–8.15pm HKEX’s Revised Listing Rules and the ESG reporting guide – updates and insights

1.5

9 January 2020 4.30pm–6.00pm Women on boards: value all around 1.5

ECPD forthcoming seminars

For details of forthcoming seminars, please visit the CPD section of the Institute’s website: www.hkics.org.hk.

30 October Is it the right time for an Employee Share Ownership Plan (ESOP)?

Alberta Sie FCIS FCS(PE), Institute Professional Services Panel member, and Company Secretary & Director, Reanda EFA Secretarial LtdWendy Ho FCIS FCS(PE), Institute Education Committee member, and Executive Director of Corporate Services; Eva Ngai FCIS FCS(PE), Director of Corporate Services; Tricor Services Ltd; and Alix Chan, Director, BOCI Securities Ltd

31 October Enterprise risk management for environmental, social and governance-related risks

Kitty Liu FCIS FCS, Institute Education Committee member, and Company Secretarial Consultant, Law Department of the Hong Kong office, AIA International LtdRicky Ho, Director, Risk Advisory Services, AVISTA Group

Chair:

Speakers:

Chair:

Speaker:

1 November Company secretarial practical training series: notifiable transactions: practice and application (re-run)

Jenny Choi FCIS FCS(PE), Institute Professional Services Panel member, and Associate Partner, Ernst & Young Company Secretarial Services LtdRicky Lai FCIS FCS, Company Secretary, HKC (Holdings) Ltd

Chair:

Speaker:

December 2019 44

Institute News

Membership

New graduates The Institute would like to congratulate our new graduates listed below.

Chan Chun Yu

Chan Yung Chi, Shirly

Kam Wai Yan, Vanessa

Lam Lai Shan

Lam Yu Hin, Alan

Leung Chun Ming

Leung Kit Ling, Elaine

Lo, Eraine

Tam Sik Wai

Tang Siu Fung, Calvin

Wong Chung Him

Forthcoming membership activities

Date Time Event

11 January 2020 8.45am – 5pm Fun & Interest Group – Day-tour at Lai Chi Wo & Kat O

For details of forthcoming membership activities, please visit the Events section of the Institute’s website: www.hkics.org.hk.

Advocacy

Training workshop for Secretariat teamThe Institute tailored a half-day team dynamics training workshop for the Secretariat’s senior management on 16 October 2019. The workshop included a non-judgmental personality assessment and a game-based business simulation involving strategic thinking, managing change, collaboration and negotiation techniques. The Secretariat team found the workshop very interesting and useful to help improve internal motivation, support, collaboration and communication.

HKMA Best Annual Reports Awards Presentation Ceremony 2019As a representative of the Institute, Company Secretaries Panel member May Tsue FCIS FCS was invited by The Hong Kong Management Association (HKMA) to serve on the Panel of Adjudicators of HKMA’s Best Annual Reports Awards 2019.

Subsequently, on 4 November 2019, Institute Council member Bernard Wu FCIS FCS and Ms Tsue participated in the HKMA’s Best Annual Reports Awards 2019 Presentation Ceremony.

December 2019 45

Institute News

Advocacy (continued)

Annual training programme for H-share companies The Institute’s annual training programme for H share companies was held in Hong Kong between 12 and 15 November 2019. It was attended by over 55 board secretaries and senior executives from H share, A+H share and redchip companies. Speakers from Hong Kong Exchanges and Clearing Ltd, Independent Commission Against Corruption, Securities and Futures Commission, as well as experienced market practitioners and professionals shared their professional knowledge and hands-on experience on a range of

topics, including the latest regulatory developments, financial reporting standards, inside information disclosure, connected transactions, risk management, due diligence and media relationship management.

The Institute would like to thank all speakers, participants and the sponsor (Tricor Services Ltd) for their generous support of this event.

T: +852 3796 3060E: enquiries@ninehillsmedia.com

W: www.ninehillsmedia.com

Raisyour

profile

e

Content marketing

Advertisement design

Event signage

Professional magazines

Corporate newsletters

Copywriting

December 2019 46

Student News

International Qualifying Scheme (IQS) examinations

Examination results slipsStudents can now check their examination results online in their own login account at the Institute’s website: www.hkics.org.hk. Starting from the December 2019 examination diet onwards, examination results will be made available on each candidate’s own login account only. The examination results will no longer be sent to the candidates by mail.

Examination Postponement Application Candidates who could not attend a scheduled December 2019 IQS examination may submit a medical certificate to apply for examination postponement. All applications must be submitted to the Institute within three calendar weeks from the end of the December 2019 examinations, that is on or before Friday 27 December 2019.

Information Session at City University of Hong KongAn information session was held for students of the School of Law, City University of Hong Kong on 31 October 2019. Information about the Institute, the dual designation of Chartered Secretary and Chartered Governance Professional, the Chartered Governance Qualifying Programme (CGQP) and studentship registration was provided during the session.

Professional Seminar at The Hong Kong Polytechnic UniversityOn 5 November 2019, Institute member Andrew Tsang FCIS FCS conducted a professional seminar on ‘Directors’ Duties’ to 40 accounting major students of The Hong Kong Polytechnic University. Information about the dual designation of Chartered Secretary and Chartered Governance Professional was also provided to the students.

Governance professionals information sessionA governance professionals information session was held on 27 November 2019 for anyone interested in joining the Institute and obtaining the dual designation of Chartered Secretary and Chartered Governance Professional. Institute members Christine Chung FCIS FCS, Company Secretary, Virtual Banking by Standard Chartered Bank, and Cherie Mak ACIS ACS, Vice-President, SWCS Corporate Services Group (Hong Kong) Ltd, shared their work experience and routes to the dual qualification with the participants. Rory Herbert, the UK representative of the inaugural intern exchange programme between the Institute and the Worshipful Company of Chartered Secretaries and Administrators in London, acted as the facilitator for the sharing session. The participants found the sharing useful and inspiring.

December 2019 47

Student News

HKICS new qualifying programme With effect from 1 January 2020, HKICS will launch a new qualifying programme, the Chartered Governance Qualifying Programme (CGQP), which will replace the current International Qualifying Scheme (IQS). The first examination diet under the CGQP will be held in June 2020.

The CGQP consists of two parts covering seven modules, of which six are compulsory and the seventh is chosen from two electives. The structure allows students to learn and take the examinations in a progressive manner.

Part One of the CGQP comprises four modules, which aim to build students’ technical knowledge in governance, law, finance and compliance. Part Two covers four modules, of which two are electives, that seek to enhance students’ comprehensive understanding of risk, strategy, and boardroom dynamics or taxation.

The CGQP programme structure, syllabuses, admission requirements and exemption policies are posted on the Chartered Governance Qualifying Programme section under the Studentship section of the Institute’s website: www.hkics.org.hk.

Starting from 1 January 2020, all students can review via their own login account the remaining modules under CGQP after the transition from IQS to CGQP. Transition arrangements at this stage will not be applicable to students who enrolled for the December 2019 examination diet and current CCA students under the IQS syllabus.

For details, please visit the Studentship section of the Institute’s website: www.hkics.org.hk.

For enquiries, please contact the Education and Examinations Section: 2881 6177 or email: student@hkics.org.hk.

Collaborative Course Agreement Signing CeremonyOn 30 October 2019, the Institute signed a Collaborative Course Agreement with The Open University of Hong Kong (OUHK) regarding the Master of Corporate Governance (face-to-face) (MCG) programme of OUHK. The curriculum of this MCG programme is aligned to the Institute’s new Chartered Governance Qualifying Programme (CGQP). Students admitted to this MCG programme in 2019 autumn and thereafter will be studying the CGQP syllabus.

December 2019 48

Student News

Studentship

Policy – payment reminder Studentship renewalStudents whose studentship expired in October 2019 are reminded to settle the renewal payment by Monday 23 December 2019.

Exemption feeStudents who received an exemption confirmation notice issued in September 2019 are reminded to settle the exemption fees in three months, that is by December 2019. Please refer to the exemption confirmation email for the payment deadline.

Important notice to students – Further Exemption Applications and Exemption Policies under CGQPThe Institute has announced revised policies on exemptions and further exemption applications under the Chartered Governance Qualifying Programme (CGQP). Students are reminded to read the important notice via email or under the News section of the Institute’s website: www.hkics.org.hk.

Featured job openings

Company name Position

Sit, Fung, Kwong & Shum, Solicitors

Company Secretarial Assistant/ Officer

Link Asset Management Limited

Deputy Company Secretary

Shenzhen International Holdings Ltd

Manager - Company Secretarial Department

CK Asset Holdings Ltd Manager, Company Secretarial Department

Link Asset Management Ltd Senior Manager - Company Secretarial

For details of job openings, please visit the Job Openings section of the Institute’s website: www.hkics.org.hk.

Effective Governance Professionals Online Recruitment Platform

Advertise your vacancy in our Job Openings section on www.hkics.org.hk or scan these QR codes:

Your direct source for:

• Reaching out to, and

• Building brand with

over 9,000 qualified and to-be-qualified Chartered Secretaries and Chartered Governance Professionals.

For enquiries, please contact HKICS secretariat at marketing@hkics.org.hk, or (852) 2881 6177

Online Job Submission Form

Hottest Job List

Featured job openings

CS Practical Training Series:The Essential Elements of a

Corporate Compliance ProgrammeFormation of Common Vehicles in

Hong KongHow Easy to Close Down a Company

in Hong KongDissolving a Hong Kong Company and

Restoration ThereofManaging Corporate Risks - Introduction

to COSO Enterprise Risk Management

FrameworkRisk Management and Internal Control

Register now!

Registration: https://ecentre.ouhk.edu.hk/cpdcourse/en/HKICS/index.jsp

CPD section of HKICS website: www.hkics.org.hk

Enquiries: 2830 6011 / 2881 6177 / cpd@hkics.org.hk

HKICS Online CPD seminars

Anytime anywhere at your convenience

2019_eCPD_OUt.indd 1 14/10/19 8:57 pm

Governance Cloud from Diligent.Creators of Diligent Boards.www.diligent.com/au/governance-cloud/

For more information or to request a demo, contact us today:

⊲ Singapore 800 130 1595 ⊲ India 000-800-100-4374 ⊲ info@diligent.com

⊲ Malaysia +60 (3) 9212 1714 ⊲ Hong Kong +852 3008 5657 ⊲ diligent.com/au

Board meeting software is secure software to help streamline board governance. It is a collaborative tool that allows boards of directors to securely access board documents and work with other board members electronically. Access to board documents and collaboration can be done from their phones, tablets, computers or offline.

⊲ #1 Global Solution ⊲ Cross-Device in Real-Time

Begin your journey with Diligent Boards. Grow with Governance Cloud.

⊲ Collaborate and Deliberate ⊲ Secure Access

Introducing

Paperless Board MeetingsDiligent’s Governance Cloud TM

™